Edited version of private ruling

Authorisation Number: 1011812822740

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Ruling

Subject: Capital allowances: small business and general business investment allowance.

Issue 1

Do the assets purchased by the Business in the 2010 financial year, qualify for the Small Business & General Business Investment Allowance pursuant to Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Question 1

Are the assets purchased by the Business in the 2010 financial year depreciating assets for which a capital allowance deduction is available under section 40-25?

Answer: Yes.

All assets purchased in the 2010 financial year by the Business are depreciating assets for which a capital allowance deduction is available under section 40-25.

Question 2

Is the Business considered to be a small business pursuant to section 328-110 of the ITAA 1997?

Answer: Yes

Question 3

Do all the assets purchased by the Business qualify for the 'Small business and general business tax break in the 2010 financial year pursuant to Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Only assets purchased by the Business before 31 December 2009 qualify for the small business tax break.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

13 December 2008

Relevant facts

The Business manages a building.

The tax agent for the Business has advised that the aggregated annual turnover of the Business and its associated entity was:

The Business provided tax invoices for the assets four of which were purchased between 1 July 2009 and 31 December 2009 and two in the period 1 January and 30 June 2010. One item cost less than $1,000.

The tax agent, in a phone conversation with an officer of the ATO advised that all assets listed above were installed the same day they were purchased.

The depreciation schedule for the Business confirms amounts and acquisition/installation dates of assets listed above as the first element of the cost base.

In a subsequent phone conversation your tax agent, also advised:

· The two similar items are not integrated or reliant on the other in any way.

· The business is situated and operated in Australia only.

Relevant legislative provisions

Income tax Assessment Act 1997

Division 43

Division 41

Section 40-25

Section 328-110

Reasons for decision

Issue 1

Do the assets purchased by the Business in the 2010 financial year, qualify for the Small Business & General Business Investment Allowance pursuant to Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

All legislative references are to the Income tax Assessment Act 1997 (ITAA 1997).

The Small Business and General Business Tax Break measure provides an additional deduction for business investment in new, tangible depreciating assets and new expenditure on existing assets. Generally, the tax break is available for new investment in tangible depreciating assets for which a capital allowance deduction is available under section 40-25.

Question 1

Are the assets purchased by the Business in the 2010 financial year depreciating assets for which a capital allowance deduction is available under section 40-25?

Subsection 40-45(2) provides that Subdivision 40-B does not apply to depreciating assets that are capital works (such as buildings and structural improvements) for which an amount is deductible under Division 43. In other words, if an item qualifies for a capital works deduction under Division 43, it will not be an eligible depreciating asset for the purpose of claiming the tax break.

Under section 43-10 of the ITAA 1997, expenditure on capital works is deductible if:

· the capital works have a construction expenditure area

· there is a pool of construction expenditure for that area, and

· the area is used in the income year in the way set out in the table in section 43-140.

For capital works commenced after 30 June 1997, the table in section 43-140 requires that the area be used for the purpose of producing assessable income or carrying on research and development activities. The Business generates most of its assessable income from the operation of the building.

Where an expenditure falls within the definition of capital works in Division 43, it may nevertheless still be deductible under Subdivision 40-B if paragraph 43-70(2)(e) applies.

Paragraph 43-70(2)(e) specifically excludes expenditure on "plant" from the operation of Division 43. As a result, a deduction for decline in value of an item that is a plant is available under Division 40.

Generally, to determine whether an item is a plant it requires an examination of its functionality. If the function is to provide the setting or environment within which income producing activities are conducted (that is, a building) the asset will generally not qualify as plant. The building is the setting or environment which generates the income for the Business through rental and management.

The items purchased in the 2010 financial year were examined to determine whether they were capital work items or capital allowance items.

Taxation Ruling TR 2004/16 Income tax: plant in residential rental properties provides the Commissioner's view of what is 'plant'. Paragraph 29 of Taxation Ruling TR2004/16 states:

29. That which is merely the 'setting' for the particular taxpayer's income earning activities is not within the ordinary meaning of plant. Whether 'buildings, structures or the like, or parts of them' that are more than merely 'setting' come within the ordinary meaning of plant depends upon 'whether the function performed by the thing [the building, structure, or part of it] is so related to the taxpayer's operations or special that it warrants it being held to be plant.'

A freestanding structure was considered to be plant for the purposes of section 40-25.

TR 2004/16 expands on the ordinary meaning of plant in paragraph 32:

The English cases on the ordinary meaning of plant do, however, suggest that the question of incompleteness of the structure without the relevant item is a relevant consideration when determining whether the item forms part of the structure. In Scottish Newcastle Breweries ¹⁹ Lord Lowry²⁰ made the distinction between something that is part of the premises and something that merely embellishes them. ²¹ In Wimpy International Ltd & Anor v. Warland (Inspector of Taxes )²² Hoffman J²³ considered that the question whether something had become part of the premises was not 'the same as whether it has become part of the realty for the purposes of the law of real property or a fixture for the purposes of the law of landlord and tenant.' ²⁴ That view accords with the Australian cases which clearly indicate that fixtures may be plant. ²⁵ Further, Hoffman J usefully provided guidance as to some relevant matters to be considered to determine the question of fact and degree as to whether an item forms part of the premises or retains a separate identity. These are:

· whether the item appears visually to retain a separate identity; ·

· the degree of permanence with which it has been attached; ·

· the incompleteness of the structure without it; and ·

· the extent to which it was intended to be permanent or whether it was likely to be replaced within a relatively short period. ²⁶

No one of those factors is necessarily conclusive and the relative importance of each will vary depending on the nature of the item.

Other equipment purchased was regarded as having a visually separate identity, and not an integral part of the building or attached permanently. The equipment installed is regarded as plant for the purposes of section 40-25.

Paragraph 45-40(1)(a) extends the meaning of plant to include articles, machinery, tools and rolling stock. A deduction for the decline in value of the depreciating assets is available under section 40-25.

TR 2004/16 elaborates on machinery in paragraph 51. Quoting The Macquarie Dictionary , 3rd edn, 1999 it defines machinery as:

· machines or mechanical apparatus.

· the parts of a machine, collectively: the machinery of a watch .

and machine as:

1. an apparatus consisting of interrelated parts with separate functions, which is used in the performance of some kind of work: a sewing machine .

2. a mechanical apparatus or contrivance; a mechanism.

3. something operated by a mechanical apparatus, as a motor vehicle, a bicycle, or an aeroplane.

4. Mechanics

(a) a device which transmits and modifies force or motion.

(b) simple machines, the six (sometimes more) elementary mechanisms, that is, the lever, wheel and axle, pulley, screw, wedge, and inclined plane.

Mechanical items purchased were determined to be plant under the extended definition.

All the items were determined to be assets for which a deduction for the decline in value is available under section 40-25. The assets are therefore eligible to be considered for the tax break.

Question 2

Is the Business considered to be a small business pursuant to section 328-110 of the ITAA 1997?

A general requirement to be a small business entity is that a business' aggregated annual turnover is less than $2 million for the current year. Aggregated annual turnover includes income from any business that is connected with or an affiliate of the business. Your tax agent advised the aggregated annual turnover of the Business included income from an associated entity. The Business's aggregated annual turnover in 2009 was over $2 million. Subsection 328-110(1) provides for a business that has operated in a particular year to be a small business entity if the aggregated turnover for the previous year was less than $2 million or the aggregated turnover for the current year is likely to be less than $2 million. In this case the Business had an aggregated annual turnover of under $2 million in the previous year. It is considered to be a small business entity for the 2009 income year by virtue of subparagraph 328-110(1)(b)(1).

Question 3

Do all the assets purchased by the Business qualify for the 'Small business and general business tax break in the 2010 financial year pursuant to Division 41 of the Income Tax Assessment Act 1997 (ITAA 1997)?

To be eligible for the small business and general business tax break, an asset must be a tangible 'depreciating asset' for which a deduction is available under section 40-25.

Section 40-30 defines a depreciating asset as an asset with a limited effective life that can be reasonably expected to decline in value over time. Land, trading stock and intangible assets are all excluded from the definition of a depreciating asset. Some intangible assets are made exceptions under section 40-30(2).However the tax break specifically excludes all intangible assets.

The object of division 41 is to provide a temporary tax break for Australian businesses using assets in Australia, with a view to encouraging business investment and economic activity. Section 41-10 allows an additional deduction for certain business investment in new, tangible depreciating assets and for new expenditure on existing assets - the 'tax break'. The assets the Business purchased and installed in its building in Australia are all eligible tangible assets for which a deduction is available under section 40-25 for the financial year ended 30 June 2010.

To be eligible for the tax break, the total of the recognised new investment amounts for the income year in relation to each asset must equal or exceed the relevant new investment threshold (paragraph 41-10(1)(d)).

Section 41-20 defines a recognised new investment amount for an asset as an amount which fulfils all of the following conditions:

· Is included in the first or second elements of the asset's cost base

· The investment commitment time for the amount occurs between the 13 December 2008 and 31 December 2009

· The first time use of the amount occurs not later than the end of the income year and before 31 December 2010. For new assets, the 'first use time' is when you start to use the asset or have it installed ready for use

· The first time use of the asset is in a business in Australia.

· It is the first time the asset has been used for any purpose other than testing or trialling

· A deduction for the tax break has not been allowed in a previous year for the asset.

An asset's first element of cost is worked out as at the time you begin to hold the asset. It generally consists of the amounts that you have paid in order to start to hold the asset. An asset's second element of cost includes the amounts that you have paid in order to bring the asset to its present condition and location, such as the cost of improvements or modifications. The second element of cost can also include costs of selling an asset. However, these costs are not eligible for the tax break. The Business's depreciation schedule for the 2010 financial year shows that only the first element of the cost base for each asset is the recognised new investment amount to be considered for the tax break.

The listed assets purchased before the 31 December 2009 will meet the investment commitment time requirement. Two items were not purchased within the investment commitment time. Although these two assets were installed ready for first time use before 31 December 2010, each of the conditions must be meet for each new investment amount. The purchase date for both items was post 31 December 2009.

The new investment amounts for the listed assets meet the remaining conditions. The assets are all new stand alone items that have not previously been used and entered on the business' depreciation schedule as a deduction in a previous year. The assets are used in a business that is in Victoria, Australia.

Section 41-35 prescribes the new investment threshold amounts as $1,000 for a small business entity or $10,000 for larger businesses. To qualify for the lower threshold, you need to be a small business entity for the income year in which you undertake new investment in an eligible asset, put that investment to use, or claim the tax break. The Business purchased and installed the assets in the 2010 financial year and wants to claim the tax break in that year.

Subsection 328-110(4) identifies the Business as a small business entity for the financial year ended 30 June 2010 because it carried on a business of managing a shopping centre and its aggregated turnover for 2010 was less than $2 million. As a small business entity the Business has a new investment threshold of $1,000.

The general rule is that the new investment threshold is applied on an asset by asset basis, meaning that it must be met in relation to each individual asset. One item was purchased as an independent unit for $xxx in early 2010. It is less than the small business new investment threshold of $1,000. Therefore paragraph 41-10(1)(d) applies and is not an eligible asset for the small business tax break in the 2010 financial year. The remaining assets' recognized new investment amounts exceed the small business new investment threshold of $1,000.

The Business qualifies for the small business tax break for the four items purchased between 1 July 2009 and 31 December 2009. The Business is therefore able to claim a deduction of 50% of the total of the recognized new investment amounts for the financial year ended 30 June 2010 pursuant to paragraph 41-15(1)(a).

The assets purchased after 31 December 2009 do not qualify for the tax break as they do not meet the investment commitment time and/or the small business new investment threshold for a small business entity.